'See You in September' Might be Out of Tune This Year For Gold Prices

This essay is based on the Premium
Update posted on September 3rd, 2010

Like the song says - See
you in September - the ninth month has notoriously been the strongest
calendar month for gold. Rather than accept this blindly as Gospel Truth,
we have decided to delve into this in detail to see what factors could
be used to explain this phenomenon. After all, statistics can sometimes
be misleading, for instance if someone owns a dog that does not mean that
they both on average have three legs.

We studied the charts for a ten-year history of gold prices. The most obvious
pattern through the decade is the presence of an August corrections in nearly
every one of the ten years. So is the September rally nothing more than a reversal
of the August downturn? Not necessarily, as there are also fundamental patterns
involved, but the move is generally amplified by the fact that gold was correcting
in August, and that it is ready to rally. If so, then the September effect
could not play out in the way many investors expect it to (immediate surge
in prices).

The months of August and September have been outlined as the focal points.
Please take a look at the Gold chart for 2002, for example (charts courtesy
by http://stockcharts.com.)

Now let's take a look at 2003 below. There was clearly no August correction
in that year, and there was no clear rally in September. In fact, the August
rally resulted in a September correction. Does this seem at all similar to
2010? Have we not seen gold rally for the entire month of August?

Now, let's examine another possibility. Perhaps investors have been waiting
to see a September rally based on historical trends. The thinking might go
something like this: if there is going to be a huge September rally then why
would I sell just before it? It is quite possible that if higher prices are
not seen very soon, these investors will reluctantly liquidate their positions
and this could be the impetus for a bigger correction in gold's price. The
outlook for gold appears to be more bearish than bullish - taking the next
1-3 weeks into account - when all these factors are considered.

There is another fact that simply cannot be omitted. On average, the rally
starts in the middle of the month, as you can see this clearly on the chart
below.

Please note that even if we agree that gold is to rally in September and the
rally will be strong - the odds still favor that taking place in the second
half of the month.

Having briefly commented on the situation in the yellow metal itself, let's
move to the mining stocks.

Last week we've seen that gold stocks again failed to move above the rising
resistance line. This is quite similar to the scenario for gold itself in recent
days. No decisive - although impressive on a day-to-day basis - move higher
has been accomplished either. The prices of precious metals stocks did move
higher in the past days, but they did not break above significant resistance
levels yet. We will look at the short-term chart for more details.

In this week's short-term GDX chart we see that mining stocks are right at
the multi-month resistance level, which is indicated by a red line on this
week's chart. In addition, the rising resistance line was also not broken.
The indication here, therefore, is that lower prices are likely before any
additional rally can materialize. Furthermore, lower volume levels may be an
indication that buying power is drying up which would further support a likely
decline in prices.

There seems to be some indication at this time that points to the possibility
of a huge rally following the likely correction which we have been discussing.
One factor, which supports this hypothesis, is the possible formation of a
cup-and-handle pattern in our chart. The cup portion of this pattern would
actually be where we are today and the handle would be formed by a correction,
which we see as a real possibility very soon. The likely bottom would then
follow in mid-September with a subsequent rally in the weeks to follow.

Although this is quite speculative as of now, we are looking at all possibilities
and feel that this is worth mentioning due to the positive risk-reward ratio,
which it would present.

This week we showed Subscribers to
our Premium Service the Gold Miners Bullish Percent Index, which we find to
be a reliable way to analyze current trends. The Williams' %R and RSI showed
us that we are in the overbought territory. The indicators gave our Subscribers
the timing for what we believe will likely be the local top.

Signals coming from the mining stocks indicate that a correction is very possible
and may be seen very soon. This will quite possibly provide excellent opportunities
for investors to enter the market with favorable risk-reward ratios and tremendous
profit potential. We will continue to watch for these developments daily and
inform our Subscribers accordingly when the situation warrants.

This week we received an interesting question from one of our Subscribers.
He wanted to know if technical analysis is still reliable when global fundamentals
are changing, things like quantitative easing, Europe's problems, China's rapid
growth, etc.

The most important fundamental that does not change over time is human psychology
and emotional behavior of individual investors. This is something by far more
stable than even several bouts of quantitative easings. China's growth will
not cause people to stop being greedy when they see higher prices and fearful
when they see them decline. Europe's problems will not cause people to act
by means of cold logic alone. Technical Analysis's foundations are based on
real mechanisms, which are inherent part of human nature, and that is not something
that is going to change anytime soon.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

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